Germany's highest court on Wednesday rejected calls to block Europe’s permanent rescue fund, paving the way in a much-anticipated ruling for its ratification by the country's president. (Ronald Wittek/AP)

The European Union breathed a huge sigh of relief Wednesday after a German court ruled that Berlin’s approval of aid for its deeply indebted neighbors was not unconstitutional, paving the way for a rescue fund considered vital to containing the region’s debt crisis.

But the notoriously activist judges of the Constitutional Court also set conditions, including that Germany’s contribution of about $245 billion to the $640 billion fund could not increase without parliamentary approval.

Nevertheless, the decision marked a victory for Europe’s financial rescue plan in a region desperately trying to contain a debt crisis that has rocked global markets for nearly three years.

The much-anticipated ruling had loomed large over the continent, reminding observers of the legal and political challenges to rapid crisis management in a currency union made of 17 nations, each requiring ratification of action plans through its own peculiar and often arcane rules.

A judgment against German aid for its neighbors could have thrust Europe into a far more dangerous predicament, upending years of diplomatic teeth pulling to establish the fund. It could additionally have thrown a wrench into plans announced last week by the European Central Bank to buy up the debt of troubled nations to bring down their hazardously high borrowing costs — a plan that explicitly counts on the establishment of the bailout fund, known as the European Stability Mechanism.

The ruling boosted European markets, which had been worried about the immediate threat of the region’s biggest benefactor having its hands tied by the court. The decision was being hailed by Germany’s ruling coalition, led by Chancellor Angela Merkel, for whom a rejection of the ESM would have presented an imposing new obstacle.

“This is a good day for Germany, and this is a good day for Europe,” Merkel told German lawmakers. “Germany is sending once again a strong signal out to Europe and beyond it.”

The ruling came on the same day as voters in the Netherlands were going to the polls, with pro-euro parties expected to win — albeit after a campaign that highlighted how distrustful many Europeans are about ceding more authority to the E.U.’s administrative capital in Brussels.

Punctuating how the crisis is accelerating regional integration, E.U. officials Wednesday outlined plans for a previously announced banking union in which national regulators would forfeit ultimate authority over the region’s 6,000 financial institutions to the ECB.

Germany and other countries that are funding much of the bailout effort have demanded that bank supervision be transferred to the central bank to ensure that local politics do not interfere with financial oversight or get in the way of closing down ailing firms when necessary. Other proposals, which have yet to win agreement, include setting up a regional deposit insurance system and establishing a common procedure for closing bankrupt financial firms.

But heightened integration is troubling to many in Europe, leading to the rise of nationalist parties and attempts by opponents to throw up obstacles. Indeed, the German ruling Wednesday came as the result of a legal challenge seeking to block lawmakers from allowing frugal German taxpayers to foot the lion’s share of the bill to aid their troubled neighbors.

The decision, made in an atmosphere of theatrical drama by the court’s eight red-robed judges, amounted to a ruling on requests for an injunction to the ESM, which were denied. The decision, though, cleared the way for German President Joachim Gauck to ratify the ESM treaty, which was approved by Germany’s parliament in June. However, experts were divided about how Gauck must comply with the court’s decision, which could potentially mean adding a new clause to the German ratification documents that would then need to be passed on to officials in Brussels.

Jean-Claude Juncker, head of the euro zone’s group of finance ministers, issued a statement Wednesday saying that, given the court’s decision, the first official board meeting of the ESM fund would be called for Oct. 8.

In addition, the court gave a green light to Germany’s participation in a fiscal treaty enshrining enforceable budgetary discipline on the 25 E.U. nations that signed it in January.

Although it was a defeat for those seeking to stanch German aid to its neighbors, the court’s message to politicians that they must act carefully not to violate the constitution in offering aid seemed to offer a dim light of hope for euroskeptics who want a German referendum on the euro.

In a poll released last week, 54 percent of those asked were hoping that the court would block the rescue fund, with 25 percent hoping it would rule in favor.

“Even if I am a little disappointed, we have really done something for democracy today,” Gregor Gysi, head of the Linke party, which filed suit seeking to block the ESM, told Germany’s ARD Public Television.

Howard Schneider in Washington contributed to this article.